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4Brazilian Institute of Corporate Governance

Corporate Governance Handbooks

Sustainability Guide for CompaniesAn Overview for Directors and Senior Executives

Handbook 4 - Sustainability Guide for Companies.indd 1 16/05/2009 14:45:50

Handbook 4 - Sustainability Guide for Companies.indd 2 16/05/2009 14:45:50

Sustainability Guide for CompaniesAn Overview for Directors and Senior Executives

Foreword by Mervyn E. King

2008

Handbook 4 - Sustainability Guide for Companies.indd 3 16/05/2009 14:45:51

Brazilian Institute of Corporate Governance

The Brazilian Institute of Corporate Governance (IBGC, to use its Portuguese acronym) is dedicated exclusively to the promotion of corporate governance in Brazil. It is the countrys main advocate of corporate governance practices and debates, and has achieved national and international recognition.

Founded on November 27th, 1995, IBGC a Brazilian non-profit organization aims to be a reference in corporate governance, contributing to the sustainability of organizations and influencing key agents in our society towards greater transparency, justice and responsibility.

Chairman of Board of DirectorsJos Guimares Monforte

Vice-Presidents Gilberto Mifano and Mauro Rodrigues da Cunha

Board MembersCelso Giacometti, Eliane Lustosa, Fernando Mitri, Francisco Gros, Joo Pinheiro Nogueira Batista and Ronaldo Veirano.

Executive CommitteeEdimar Facco, Eliane Lustosa and Ricardo Veirano

General SecretaryHeloisa B. Bedicks

For further information on the Brazilian Institute of Corporate Governance, please visit the website: www.ibgc.org.br. To become an IBGC member please call: + 55 (11) 3043-7008.

B827s Brazilian Institute of Corporate Governance. Sustainability Guide for Companies: An Overview for Directors and Senior Executives / Brazilian Institute of Corporate Governance; coordination by Carlos Eduardo Lessa Brando and Homero Lus Santos; foreword by Mervyn E. King; translation by Jodie Thorpe. So Paulo, SP: IBGC, 2008. (Corporate Governance Notebooks Series, 4).

48p.

Translated from: Guia de Sustentabilidade para Empresas, c2007. ISBN: 978-85-99645-08-06

1. Corporate Governance. 2. Sustainable Development. 3. Sustainability. I. Title. II Brando, Carlos Eduardo Lessa, coord. III Santos, Homero Lus, coord. IV.Thorpe, Jodie, trans.

CDU 658.4

Librarian in charge: Mariusa F. M. Louo CRB-12/330

Handbook 4 - Sustainability Guide for Companies.indd 4 16/05/2009 14:45:51

Credits

This work was carried out by the Sustainability for Companies Study Group (GESE), established by the IBGC.

Acknowledgements

To Professor Mervyn King, who had the kindness to write the foreword for this document.

To the staff of IBGC, who gave their support to the GESE, and to Cristine Zanarotti Prestes Rosa, who, in addition to being secretary for the project, contributed so much to the content of this document.

To the GESE members who are also members of IBGC, who gave their time so generously for the development of corporate governance.

To the GESE members who, even without being IBGC members, worked in the spirit of collaboration and contributed their knowledge and experience to enrich the content of this document.

Contributions

Members Non-membersCibele de Macedo Salviatto Alvaro Plnio PurezaCludio Pinheiro Machado Filho Antnio Carlos Lopes SimasFernando Foz Macedo Aron BelinkyHeloisa B. Bedicks Christina Carvalho PintoLeonardo Viegas Clarissa LinsPaulo Bellotti Diva Irene da Paz VieiraPaulo Conte Vasconcellos Elisabeth Barbieri LernerPaulo Vanca Fbio FeldmannRicardo Pinto Nogueira Giovanni BarontiniRoberto Sousa Gonzalez Luciana BrennerRogrio Gollo Marina SchurrRogrio Marques Patrcia de Caires SogayarSandra Guerra Tarcila Reis UrsiniSimone de Carvalho Soares

Coordination

Carlos Eduardo Lessa Brando (IBGCs Chief Knowledge Officer)Homero Lus Santos (Chairman of GESE)

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ContentsForeword by Mervyn E. King 6

Introduction 8

Context 10 1.1 The global context and its impact on companies 11 1.2 The connection with IBGC Corporate Governance Best Practice 12

Concepts 13 2.1 Sustainability 14 2.2 Sustainability in companies 15 2.2.1 An approach to doing business 15 2.2.2 Intangibles and externalities 16

Sustainability and business viability 18 3.1 Sustainability and the economic value of companies 19 3.2 Impact on reputation and license to operate 20 3.3 Correlation between sustainability and business success 20

The stages of sustainability in companies 22 4.1 The five stages 23 4.2 Transitions between stages 24

Application 25 5.1 Sustainability in institutional definitions and strategy 26 5.1.1 Embedding in institutional definitions 26 5.1.2 Connection with strategy 26 5.2 Sustainability and operations 27 5.2.1 Connection with operations 27 5.2.2 Setting goals and monitoring results 27 5.2.3 Compensation (remuneration) 28 5.3 Sustainability in corporate governance 28

4

3

21

5

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Annexes 30 6.1. Recent history of sustainability 31 6.2. Business initiatives 32 6.3. The Triple Bottom Line (TBL) and the five-capital model 34 6.4. Sustainability tools, standards and indicators 35 6.4.1 Principles-based standards 35 6.4.2 Performance standards 35 6.4.3 Process standards 36 6.4.4 Hybrid standards 36

References 39

Glossary 42

6

78

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There is a gap between the financial and economic value of a company. The price of any share

on any stock exchange in the world will not equal book value. This is because traditional accounting does

not take account of intangibles or the so-called non-financial aspects.

In the 21st Century, intangibles can be more valuable than tangible assets. One therefore has

an iceberg effect, where the tangibles are accounted for and what is really valuable is not even seen on

the balance sheet or on the profit and loss statement. Intangibles such as goodwill, brand, reputation, the

quality of governance, the quality of management, the human rights record of a company, social and labor

issues and a companys treatment of the eco-systems in the community in which it operates have all become

material issues today.

There is growing public attention on key sustainability issues. The best example is climate

change. When companies are asked why they report on sustainability issues, their answers are varied. For

example, we do it because our competitors are doing it; we have found that strategically we are able to

manage reputation and brand in a more informed manner; our stakeholders want it; and perhaps most

importantly of all, it improves our risk management. The latter is probably the most significant because

sustainability issues can become huge risk issues for a company.

Sustainability issues can be grouped under the headings of Economic, Environmental and Social.

It is important for companies to be able to report on the economic impact which its operations have had, both

positively and negatively, on the community in which it operates during the year under review. The company

should also be able to report on how it intends to enhance the positive aspects and eradicate or ameliorate

the negative aspects of the companys operations in the community in which it operates in the year ahead.

It should also report on the companys impact on the communitys eco-systems. People, planet

and profit can no longer be separated.

Foreword

6 Sustainability Guide for Companies

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Human rights and social issues are also significant sustainability issues. Thus, for example, in

regard to procurement contracts, a company needs to make sure that their suppliers are not discriminatory,

there is freedom of association and they do not use child labor. If they do, it can have material reputational

damage for the company. Likewise, a company should check whether its suppliers have in place proper

occupation, health and safety measures in producing the goods received by the company.

One of the principles of good governance is that a board of directors has a positive duty to give

strategic direction to a company. In developing a strategy for the company, both short- and long-term issues

have to be considered. In considering the latter, one has to take account of sustainability issues. It follows

as a matter of logic that governance, strategy and sustainability have become inseparable. One can no

longer plan strategically without having regard to sustainability issues.

Stakeholders want forward looking information to be given by the preparers of annual statements.

The balance sheet and the profit and loss statement are backward-looking and a